Kevin McFarthing is an innovation ‘guru’ who spoke at IACCM‘s recent European conference. Following his interaction with the IACCM members, he has written a blog that offers some helpful ideas on how to better align contracts and relationships with the desire for innovation. His checklist is certainly worth reviewing – even if (like me) you need explanation of a few of the items on it!
As Kevin points out, more and more companies are looking to their trading partners as the primary and critical source for innovation, yet few have grasped the impact that the contracting, negotiation and risk allocation process will have on results.
The measurements used to define success for those charged with contracting (buyers, contract managers,. lawyers) rarely include anything about assisting innovation, so as Kevin observes, it is in one sense not their fault if the instruments they design are frustrating this core corporate objective. Yet on the other hand, each professional should be concerned about the contribution they are making and, as the experts, is it not our duty to eplore how contracting and negotiation can benefit innovation and then proactively approach management with our ideas?
Yes, we can sit and wait until someone demands change from us, but is that really the hallmark of a high-value employee? Is that really the best we can do in innovating our own professional contribution?
What ideas or approaches have you encountered or used within the contracting process that have been effective in subsequent innovation initiatives?
As we look at the future of contracting, one key consideration is the role (and future) of lawyers.
On the one hand, legal knowledge within today’s business environment is invaluable – research has shown it to be among the areas considered most important by budding executives. There is also no question that the role (and number) of lawyers advising the business have grown exponentially over the last 30 years.
But this has not translated to any noticeable improvement in the quality of the contracting process. Establishing commercial capabilities, negotiating and entering commitments and performing oversight of obligations and outcomes remain sources of weakness in most organizations. This is partly due to the complexity of contracting and the somewhat ambiguous role of the law department – often jealously guarding its ‘rights’, yet reluctant to take wider resposnibility for the quality of the process.
I understand why lawyers take the position they do – and in the end, it si the business executives who should be resolving the inadequacies in the way their trading relationships are formed and managed. But in my view, the tensions are set to increase, rather than reduce. And that is largely because of the surplus of lawyers in the market.
For years, most in-house counsel have viewed Contract or Commercial Managers as some form of para-legal (yes, there are exceptions and some recognize the very distinctive role they should play). But as contract complexity has increased, and as the growth in the number of pure legal jobs has declined, the role of contract or commercial manager has become steadily more attractive as a fall-back. Many trained attorneys have even discovered what a fascinating role it can be.
But legal knowledge is only one aspect of being a good contracts manager. And too many lawyers not only starts to skew the broader business value, it also sets up contention with the in-house counsel. Inevitably, those who are legally trained are tempted to stray into ‘opinions’ that, rightly or wrongly, are perceived as ‘legal advice’ by their business colleagues.
We are seeing increasing evidence of this tension. Sometimes it is addressed by consolidation fo the contracts or commercial organization within the law department. That can work well, so long as it does not dilute the role that the commercial group should be performing (and turn them into administrators or para-legals).
The problem is real, as The Economist recently pointed out. Supply of newly trained lawyers now far exceeds demand and they are generally intelligent, assertive individuals who will find jobs of some sort – in many cases in business roles outside the law department.
IACCM has been working with a growing number of organizations where the General Counsel has wanted to resolve the interface between the law department and the business as it relates to contract negotiation and management. I have a feeling that there will be many more who start to ask questions over the next two years.
I wrote recently about the challenges created by increasing regulation and the extent to which it can affect national and international competitiveness. When last I commented, it was because of the growing competition between US states to lower regulatory burdens as a way to attract business. Today, I was alerted to the on-going challenges to offshore outsourcing and the way this might affect operational decisions.
AmEx Sued for Forfeiting Customer Rights by Outsourcing to Foreign Nationals Overseas was the headline that greeted me on a brief from Washington D.C. law firm Beins, Goldberg & Hennessey, LLP. The case gravitates around the claim that AmEx has failed to disclose to certain clients their loss of US 4th Amendement privileges as a result of outsourcing financial data management to overseas locations staffed by foreign nationals. Specifically, this means (according to the suit) that customer records become subject to seizure by the US Government, which ‘routinely seizes and searches communications that are received by or sent from foreign nationals’.
Whether or not the case proceeds, it is an illustration of the complexity being caused by the mass of regulation now impacting international trade and organizational decisions. The extra-territorial reach of much of this regulation has become a significant source of concern. I know of European financial institutions, for example, that are reluctant to do business with US companies offering data services precisely because of the considerations mentioned in this suit.
The Husdal blog reports on a paper by University of Tennessee lecturer Priscilla Wisner relating to supply chain metrics.
I commend this as important reading for any commercial professional, whether dealing with procuremnt or customer relationships. The reasons are that it illustrates the extent of the connection between business performance and contracted relationships; the overall impact of supply chain efficiency on financial results; and, most importantly, it confirms that ‘the supply chain’ is a holistic area that links both selling and buying activities.
The vast majority of commercial and contracts staff resolutely resist seeing any connection between the work of a sales contracts negotiator or manager and the work of their counter-parts in Procurement. This article not only shows how wrong they are to make this judgment, but in my view it also demonstrates how each reduces its value as a result of that separation.
As you read the list of measurements, think about the tremendous power and influence that an integrated supply chain operation can bring to business performance – and the consequent status of the practitioners who are part of it.
Last week I participated in a meeting called by the International Centre for Complex Project Management (ICCPM).
In his introduction, Professor Mike Jackson emphasized the need for project management to embrace ‘holism’ and to “Escape reductionist thinking”. As we talked, I was struck by the similarities to contracting and commercial management – and also the interdependencies between our disciplines.
‘Holism’ is based around systems thinking and the need to synthesize, rather than analyze. It therefore seeks to avoid focus on component parts and to concentrate on the interactions needed to secure the overall desired outcome. Such an approach would – for example – place far more emphasis on the importance of sustained leadership, communication, commitment and planning to project success, and less on requirement management and individual components.
As I thought about this in the context of contracts, a number of points struck me. First, a ‘holistic’ contract is made up from many clauses and terms which exist individually, but impact outcomes cumulatively. Second, the input to contracts comes from many and varied sources, each of which may have a distinctive view of what it considers ‘success’. Third, projects (and therefore the contracts that underpin them) are ‘incomplete’ until they are finished and therefore require continuous oversight and revision to maintain ‘holism’ or integrity.
The meeting discussed the challenges faced by Project Managers. Some of these related to a lack of the skills and knowledge needed to undertake ‘holistic’ management. Others involved issues such as the timing of engagement and failure to focus on critical dependencies, such as leadership risk or cultural risk.
As I listened to the problems, it caused me to reflect on similar issues in contract and commercial management – and in particular, the question of’ ‘excellence’. It struck me that an excellent contract or commercial manager is someone who engages in holistic thinking. They see the big picture and the interdependencies. They do not allow themselves to be side-tracked into excessive debate on individual clauses and functional positions. They see their role as communicating, leading, planning and gaining commitment. To do this, they must understand individual ‘reductionist’ stakeholder views and find a way to reconcile these with the broader needs of the project. They emerge with a balanced contract which is designed to cope with change.
Of course, this excellence is far from universal and many contracts groups remain tied to specific interests (for example, legal or finance) and lack the vision to expand from a focus on ‘requirements’ to a vision of ‘outcomes’. Often, there is no synthesis of the entire contract; different groups produce different parts and ‘quality’ simply means that it has been checked for inconsistencies, not that it is truly ‘fit for purpose’. As a result, project teams are given contract forms and standards that provide poor and inadequate tools for on-going management.
How might we improve? One approach will be to focus on continuing improvement in the standards of contract and commercial managers. In this regard, the growing adoption of a common perception of the role and a consistent body of knowledge is a major step. But it strikes me that a second critical aspect is the creation of collaborative relationships with others within our ‘reductionist’ universe. Functional specialism is by its nature ‘reductionist’. What all of us must do is to understand better how we fit our specialism into a holistic frame. And it may well be that commercial managers and project managers are key to creating this synergy, since each of them may have the role of harmonizing across specialist groups to ensure a level of reconciliation is achieved and maintained, to allow desired outcomes to be achieved.
This vision is not new so far as contracts and commercial management are concerned – IACCM has espoused this position from its inception. What is new is the idea that perhaps contracts and project management together lie at the core of this synthesis and success might be achieved through their willingness to coalesce and learn together.
In my last blog, I wrote about the contracting practices that sometimes undermine relationships with Chinese business. I promised also to report on the main focus of the Practical Law Company / IACCM seminar – which focused more on the rule of law.
Firstly, our experts explained that the core of Chinese law was borrowed from Japan, which had in turn been influenced by Germany. So at heart there is a civil law base, supplemented by a mix of other imports (e.g. US securities law) and local regulation. In summary, the meeting was told, there is a relatively robust body of law providing a base for contracts, but:
- some laws and regulations have not been kept adequately updated and are no longer ‘fit for purpose’
- in some situations, the issues at hand are not adequately addressed by the underlying laws and the courts exercise discretionary powers
- the quality of judges is variable and some do not understand the relevant laws
In combination, these factors have led to concerns over the quality of the underlying legal system.
Following from this is the question of enforcement. The experts confirmed the need to understand both the law and the politics, especially for any major investment. It is critical to ensure necessary licenses or permissions and wise to ensure specific knowledge and approval by relevant government authorities. Even then, legal outcomes have a degree of unpredictability. The written law is not always followed and so it is important to look for patterns in discrepancies. To some extent, laws have been drafted in ways that allow discretion.
This led to the topic of governing law, which must be used in some circumstances (e.g. joint ventures). Overall, the expert panel suggested there are no great reasons to fear Chinese law and they also pointed to the alternative of arbitration (mediation is not common). The growth of trade – and the consequential frequency of dispu.tes – has led to growing experience and precedent, which together will increase the predictability of outcomes.
For more detailed – and regular – briefings on Chinese law and contracting, I recommend http://chinalegalbrief.com/
In a seminar hosted by the Practical Law Company at its London headquarters, IACCM members were provided with insights to doing business in China. The presenters were three partners from one of China’s largest domestic law firms.
Naturally, a large part of the meeting was absorbed by the traditional legal concerns of protecting assets and enforcing rights – of which more later. My main interest was to better understand the Chinese perspective. Every day we hear about the risks that foreign firms face when doing business in China, but what about the Chinese experience of dealing with foreign firms? Are the issues really so one-sided?
We know that many of the large Chinese firms are now emerging onto the international stage and encountering first-hand the trading practices and standards adopted in the major trading nations. For them, the way we structure deals and agreements appears rather remote. They are accustomed to more focus on relationship building through physical meetings and less reliance on virtual communication and contracts. The quality of their risk assessment procedures is often high and clearly there is understanding of the legal principles that underlie approaches to risk management.
But the presenters reminded us that most of the big Western corporations are not dealing with the large, state-owned Chinese enteprises. They are buying from far less sophisticated and much smaller companies. Business is typically conducted on purchase orders and the fear of local competition means that they feel they must accept whatever terms the customer presents. These companies lack market and contract sophistication and the foreign corporates frequently take advantage of that. They think little about imposing arbitrary changes to the contract and the level of overdue and bad debt is high.
When taking this context, it puts our concerns over IP rights and contract enforcement into a different perspective. If we are selective in our choice of which contract terms to apply and the extent to which we operate with real integrity, why would we be surprised if our trading partner feels it is alright for them to also disregard the terms when they are inconvenient? To what extent is our behavior contributing to the problems we encounter in China?
And this takes us back to the traditional Legal approach to risk, which tends to be very one-sided in its analysis. There is no apparent effort to see cause and effect when we structure or negotiate our agreements. Hence the meeting focused on the typical basics of the reliability of the Chinese legal system (getting better) and the threat to IP rights (also getting better, but watch out for employee theft, more than corporate theft).
Tomorrow, I will summarize the observations about the Legal system, recourse, governing law, dispute resolution and intellectual property. For today, I hope that this blog may cause a number of us to think about the extent to which it is our actions that are undermining trust and integrity in contracts and relationships.
The academic and professional rigor behind contract and commercial management continues to increase. A growing number of business schools are jumping onto this as a critical area for business competency. Government bodies are driving many of these initiatives, pushing for new standards of training and capability.
IACCM is naturally at the forefront of these developments. As the only association that has singled out these fields for development and research, it brings a wealth of undestanding and content. I thought I would share a simple example of the types of questions that students face. If you want to share your thoughts, please do so – and I will share the answers! But as you will see, the key point to this exercise is that contracts and commercial strategies and capabiliteis are key to most of the issues identified.
“The recent General Assembly of European International Contractors focused on ‘the major prerequisites for success in large infrastructure projects’. They identified the following factors: do you agree that these are the relevant issues?
- The owner’s role in managing the project, including the setting up of a clear allocation of authority and responsibility. The importance of a clear and balanced risk allocation
- The role of partnership, cooperation and trust
- The formulation of an unambiguous contract with clear requirements
- Mechanisms for early conflict resolution
- The selection of the appropriate delivery method suitable under the circumstances
- The role of sufficient financing (reserves) in the face of uncertainty
Considering these items, discuss the role of the contract and contracting process in their delivery.
Based on these discussions, which of the factors do you deem most important (select your top 2). (Following selection, we will share the top 2 selected by the General Assembly participants and review differences).”
Most Procurement functions have steadfastly resisted building competency in contracting. For years, many of them accepted the supplier’s standard terms, supplemented by their own purchase orders. The more powerful organizations (including those from Government) developed standard terms of their own , which were either imposed or resulted in a ‘battle of the forms’. Frequently they were inappropriate to the specific acquisition, but the average buyer appeared not to know and not to care – their job was simply to tick the box that the standard terms were in place.
This reflected an era in which Procurement felt little responsibility for outcomes. Their task was to select a supplier for price, quality and delivery. What happened next was the responsibility of the relevant business unit and the supplier. The increased power of the buyer in recent years has not helped; as IACCM studies show, the incidence of buyer-imposed standard terms has increased, with strong focus on risk allocation to the supplier.
To be fair, in-house legal groups contributed to this situation. They saw little merit in negotiating with most suppliers and felt little confidence in the ability of Procurement to handle contract variations. To the business units, the message appeared to be that contracts were of little importance – it was the word rather than the spirit that mattered. Hence they would find short-cuts around renewals, and changes or amendments frequently went unrecorded. There were in any case no formal systems to capture changes, claims or other contractual matters.
Software providers – especially in ERP and spend management – created systems that reflected this dismissal of formal contracts. They presumed a transactional approach that was based on standard purchase order terms; exceptions were to be viewed as ‘non-compliance’ and therefore avoided.
Some organizations did not fall victim to this syndrome; others have awoken to the weaknesses (and missed opportunities) that it represents. We have seen an increasing number turning to IACCM for advice, training and benchmark information. But this rigidity and absence of substantive skills or systems remains prevalent and represents a continuing source of buyer-supplier friction, buyer- business unit tension, and value leakage. Increasingly, we also see specific disagreements between Procurement and Legal over roles, authority and the allocation / ownership of resources.
There are several factors that are causing this awakening; specific drivers vary somewhat between organizations.
- Weaknesses in oversight are causing unacceptable business exposures, ranging from inability to pursue claims, to inadequate management reporting, to specific regulatory compliance risks.
- An absence of formal contract management leaves the buyer exposed to supplier actions (or inactions) and results in erosion of expected performance and bottom-line savings.
- Inappropriate contract terms and poor governance leave the business weakened in its efforts to cope with market volatility and change, or to handle the regular supply chain disruptions that affect our increasingly global supply networks.
Business continuity and resilience, as well as cost-effective operations, depend on discipline, clarity of roles and responsibilities and the quality of relationships. When developed and used appropriately, these are features of good contracting practices and process. Contracts are management tools and provide a core mechanism to ensure good communications and consistency of understanding – internal and external. Those who see them purely as instruments of risk allocation are missing the point – and are in fact generating risk for their business.
The supply-side is generally far ahead in its development of contract and negotiation skills and resources. In part this is because they recognize the importance to revenue protection and obligation performance; but it has also been a direct consequence of the move towards service and solution offerings (where outcomes are decisive) and the increasingly aggressive behavior of many customers. On one level, suppliers may not welcome increased professionalism in their customers’ contract management (it removes the opportunistic margin improvements that many achieve). But in general, I believe they welcome a trend that a) should result in more intelligent up-front negotiation and agreement of scope and terms; and b) will raise post-award efficiency, reduce costs and eliminate many of the causes of contention and claims.
So Procurement’s awakening is excellent news; though at this point, many remain asleep. Let’s hope they read this article!
A criticism that is sometimes levelled against the in-house law department ( and frequently against external law firms) is their ‘lack of commerciality’. In general, this appears to mean that they are out of touch with the needs of the business and fail to provide advice that is practical or in the form of a readily-applied solution.
Last week, IACCM co-sponsored a meeting between senior in-house counsel and senior executives to discuss the interface between business and the law. It is a topic of great interest to IACCM members. The relevance to our legal membership is obvious. For those in contract or commercial management, or in procurement, the relevance takes several forms. In some instances, they are tarred with the same brush as the lawyers through association (often direct association, since in about 30% of companies they report through the General Counsel). In others, they may find themselves in some conflict with the lawyers, either because they are frustrated by the legal approach, or because there is a lack of clarity in respective roles.
The meeting participants all agreed that a key challenge for their function and their business is complexity. We then asked them to rank the causes of that complexity in terms of direct relevance to their work. For the General Counsels, the dominant reply related to regulation – the quantity, the volume of associated documentation and the ambiguity of many of the rules being introduced. “Lawyers must avoid the trap of ‘we are responsible for compliance'”, observed one General Counsel. “We must embed the regulatory environment into the business rather than have it as an overlay, with continual reference back to the legal team. Otherwise we create tension with the business.”
For the business managers, the source of complexity was mostly seen in today’s economic conditions and market volatility. They described the pressures to push commitments to the limit, to enter market sectors where they have no previous experience, to move faster in response to opportunities. These conditions frequently demand rapid decisions which run counter to the risk evaluation capabilities of the legal department. And the lawyers can often feel under pressure to give their blessing to business decisions, rather than simply offering legal advice.
The meeting looked at the impact of different organizational models on the level of integration between the business and the lawyers. In general, it appears that a center-led model (with lawyers firmly attached to the business units) is the most likely to reduce tension. It is also important for the legal group to grasp the benefits of empowerment, sharing information to allow decision-making and ensuring greater awareness of risks. Organizations with these characteristics appear to achieve greater visibility of risks at an earlier stage, allowing more intelligent intervention by the legal team and giving them more time to produce practical answers and advice.
Another key aspect, especially with regard to contracts, is to have clarity in the roles and authority of the various stakeholders – and that means the contract process needs to be defined. A big problem with this is that a majority of General Counsel do not see it as the law department’s role to oversee process definition and it is often far from clear who will take this responsibility. It is also the case that lawyers resist taking on the role, but then obstruct others when they try.
The discussion forum will lead to a more comprehensive paper, setting out the findings and recommendations in detail. It was a helpful session that identified the gaps between the priorities of the lawyer and those of the business / commercial executives. As with all relationships, success depends on the quality of communication and understanding between the parties. It was clear from the meeting that the general accusation ‘lawyers are not commercial in their thinking’ is incorrect. But it is fair to say that some law departments are not adequately connected to the business needs and have failed to build collaborative internal systems, procedures and relationships. An area of study for IACCM will be the extent to which those companies are in turn seen by their trading partners as ‘difficult to do business with’.
Commitment Matters 